India's LDCs

January 10, 2006 13:57 IST

Through a biological process, infants grow up, attracted by prospects of adulthood and adultery. There is an incentive towards growing up. However, if there are perverse incentives against growing up, infants won't graduate out of infancy.

In international trade, this is the problem with LDCs. What is an LDC? Abbreviations cause confusion. Is an LDC a less developed country or a least developed country? Strictly speaking, it is the latter, since less developed countries are now equated with developing countries.

LDCs may merit preferential trade and financial flow treatment, although it is a moot point whether development (measured by what the Millennium Development Goals say) is a function of trade, investment and aid policy, or of endogenous governance issues.

There must be objective criteria to identify LDCs and there are essentially three -- per capita GDP, share of manufacturing in GDP, and adult literacy. Countries with populations of more than 75 million are excluded.

Opponents of liberalisation and globalisation argue this increase in the number of LDCs demonstrates a failure of market-based reforms, so to speak. Poverty and deprivation are both absolute and relative concepts. We witness this in the context of attempts to target the poor in India. Judged against US poverty lines, most people in India are poor and thus, everyone wants subsidies.

But the 80/20 Pareto rule probably applies to most distributions and is fairly robust across time, space and variables. Hence, in a relative sense, 20 per cent of countries will be truly LDCs, 20 per cent will be developed, and there will be a continuum with the remaining 60 per cent spread out.

With the increasing Balkanisation of the world, the number of countries keeps increasing and that indeed is part of the reason why the number of LDCs has increased. We have almost 200 countries in the world now. If the Pareto Law holds, not more than 40 should be LDCs. Sub-Saharan Africa is generally a different proposition. But even within Africa, should Cape Verde be an LDC? Outside Africa, should the Maldives and Bangladesh be LDCs? Cape Verde and the Maldives may be taken out of the LDC list later this year. But the general proposition still holds.

We don't have incentives for graduating out. Therefore, we effectively wait until a country attains a per capita income of $750 before it moves out. Instead, we have incentives for a country to remain an LDC. At the Hong Kong Ministerial, we thus witnessed the bizarre phenomenon of Pakistan almost wanting to become an LDC.

The Hong Kong Ministerial was obsessed with duty-free quota-free packages for LDCs, plus some pious intentions about ODA (official development assistance). The latter has nothing to do with the WTO and ODA promises rarely materialise. Most LDCs already obtain duty-free quota-free packages, at least in developed countries, so the Hong Kong obsession was largely a red herring. However, duty-free doesn't only mean zero duty market access in other countries.

It also means freedom from duties or responsibilities and that is much more of a perverse incentive. Primarily because these two kinds of preferential treatment are open-ended. Conceptually, not very different from the open-ended incentives Indian enterprise obtained before reforms unshackled entrepreneurship. But that's a different story.

Of more immediate interest are India's backward districts, which will also obtain preferential treatment, through the National Rural Employment Guarantee Act (NREGA) and through other means. If one applies the 80/20 Pareto rule, roughly 120 of India's 600 districts should be backward. Indeed, any objective and independent assessment also arrives at a list of around 120.

The Food for Work Programme had 150, the Rashtriya Sama Vikas Yojana (RSVY) had 167, and now NREGA has 200. About 80 districts are therefore free-riding. They shouldn't be on the list. Unfortunately, we don't even know how or why these 200 districts have been identified, that information is not in the public domain. Initially, there were three criteria -- agricultural productivity, agricultural wage rates, and SC/ST populations. Whether these criteria are appropriate is debatable. More importantly, we never knew what weightings were assigned and how one aggregated to obtain the overall identification of backwardness. And because this wasn't known, the identification was open-ended.

We never knew when a district would graduate out of backwardness. RSVY, and later NREGA have incorporated the economically nonsensical criterion of subjectively identifying districts on the basis of political factors. The requirement of panchayats existing and devolution to panchayats taking place also seems to have been discarded. Because funds will flow, regardless of utilisation and efficiency, not a single one of these LDC districts will ever move out. We never learn.